Creditor Collusion and Antitrust Risks in Leveraged Finance: How Cooperation Agreements Reshape Restructuring and Investor Risk

The leveraged finance market has long been a battleground for competing interests, but recent developments suggest a seismic shift in how creditors, borrowers, and regulators navigate corporate restructuring. At the heart of this evolution are cooperation agreements-pacts among creditors designed to align interests and counteract exclusionary restructuring strategies. While these agreements offer strategic advantages, they also raise pressing antitrust concerns, as seen in the landmark Selecta case of 2025 and broader regulatory scrutiny. This analysis explores how such arrangements are reshaping corporate restructuring dynamics and investor risk profiles, drawing on recent legal, academic, and market insights.

The Rise of Cooperation Agreements: A Double-Edged Sword

Cooperation agreements, often termed "co-ops," have become a cornerstone of creditor strategy in leveraged finance. By pooling resources and negotiating collectively, creditors aim to prevent liability management exercises (LMEs)-tactics where borrowers restructure debt to subordinate nonparticipating lenders. These agreements typically include transfer restrictions and communication limitations to maintain group cohesion according to creditor coalition analysis. For instance, in the Selecta case, a coalition of hedge funds accused rival bondholders of forming a collusive cartel to secure preferential terms during restructuring, leading to a 70-cent-on-the-dollar valuation for the majority group versus 35 cents for the minority. This disparity underscores the potential for cooperation agreements to create value asymmetries, even as they aim to stabilize negotiations.

However, the antitrust implications are far from settled. While cooperation agreements are structured to avoid per se violations of antitrust laws, they remain vulnerable to rule of reason scrutiny under the Sherman Act. A 2025 University of Pennsylvania Carey Law School analysis notes that such agreements could resemble price-fixing or group boycotts if their terms are overly restrictive. This tension is evident in borrowers' countermeasures, such as "anti-co-op" clauses in credit agreements, which prohibit creditors from forming such pacts. The resulting legal tug-of-war highlights the fragile balance between pro-competitive restructuring and anticompetitive collusion.

Academic Insights: Creditor Rights and Investor Risk

Academic research provides critical context for understanding the broader implications of creditor collusion. Strengthening creditor rights, as seen in cooperation agreements, can discipline firm managers and reduce value-destroying acquisitions, particularly in firms with weak governance. However, this dynamic is not without trade-offs. In leveraged buyout scenarios, collateralized loan obligation (CLO) lenders-major players in the leveraged loan market-often lack incentives to support formal restructurings of distressed private equity portfolio companies. This misalignment can lead to prolonged defaults and systemic risks, as CLOs prioritize asset recovery over broader economic stability.

Moreover, high-interest-rate environments and economic uncertainty have amplified these risks. A 2025 LSTA report notes that lenders are increasingly scrutinizing covenant structures to guard against borrower tactics like drop-downs or uptiering, where assets or debt are reconfigured to disadvantage nonparticipating creditors. For investors, this means heightened exposure to liquidity shocks and valuation volatility, particularly in sectors with concentrated debt holdings.

Regulatory Scrutiny and Market Implications

Regulators are not standing idly by. The Federal Trade Commission's 2025 action against Welsh Carson for anticompetitive pricing in anesthesiology acquisitions and the DOJ's lawsuit against KKR for alleged Hart-Scott-Rodino Act violations signal a broader trend of antitrust enforcement in leveraged finance. These cases underscore the regulatory focus on structural antitrust risks, including how creditor collusion might distort market competition.

For investors, the implications are twofold. First, cooperation agreements may reduce the likelihood of creditor-on-creditor violence by promoting pro-rata treatment in restructurings according to creditor coalition analysis. Second, they introduce new legal uncertainties, as courts grapple with the enforceability of restrictive terms like transfer restrictions or remedy limitations as noted in academic research. This ambiguity could deter participation in leveraged finance markets, particularly for smaller investors lacking the legal resources to navigate complex documentation.

Conclusion: Navigating the New Normal

The Selecta case and related regulatory actions mark a turning point in leveraged finance. Cooperation agreements, while strategically valuable, are now under intense antitrust scrutiny, forcing market participants to recalibrate their approaches. For investors, the key takeaway is clear: the evolving legal landscape demands a nuanced understanding of both the benefits and risks associated with creditor collusion. As academic analyses and regulatory trends converge, the leveraged finance market is likely to see more robust documentation practices, increased antitrust litigation, and a reevaluation of risk-return profiles. In this environment, adaptability-and a keen eye on antitrust compliance-will be paramount.